If your reported income seems a little high or low, chances are you might hear a knock on your door from the Internal Revenue Service. We know the tax filing process is a colossal headache. But unless you’re evading taxes like Al Capone—and we don’t recommend that at all—the IRS understands how complex the U.S. tax code is to the average person and small business. So, they will usually write off honest mistakes. But, without taking precautionary measures, auditors may misconstrue your honest mistakes for negligence and assess you penalties.
If you own a small business and are looking to decrease your chances of getting audited, there are a few things you can do as you prepare your taxes. And, if you are called upon to show your work through an official audit, don’t worry. We’ve got you covered:
Steps to Avoid Audits…
Receipts can get destroyed, faded or absorbed in the cesspool of your unkempt car. That’s why it’s imperative to leverage technology and keep track of your expenses by utilizing a web-based bookkeeping system. We offer our own system specifically tailored to small businesses called Client Books. All you have to do is connect your bank account and credit card information, then our system will automatically record all of your expenses so you don’t have to waste time manually entering your transactions. Isn’t living in the 21st century great?
Don’t Go Overboard with Deductions
As a small business owner, you’ve probably asked yourself during income tax preparation: What can I write off on my taxes? There are plenty of expenses you can write off, such as travel, supplies, property rent, utilities, meals, entertainment, and so on. It’s tempting to claim as many deductions as possible, especially for businesses that have losses. But if your deductions are overly excessive and unusual, red flags will immediately pop up for the IRS. So, think twice before buying a row of 50-yard-line Super Bowl tickets and passing them off as a “client meeting.”
Another point to stress is that you need to make sure your small business is incorporated. Unincorporated businesses are far more likely to be audited than incorporated businesses. Whether you decide to set up a corporation or a limited liability company (LLC), you’ll receive additional tax deductions, protect your assets, and look more favorable in the eyes of the IRS. Our friends over at LegalZoom do a fantastic job of helping small business owners formalize their entity.
If You Are Audited…
Get on the Auditor’s Good Side
If you are fined for any blunders, there may be ways around it or to get that fine reduced. First off, you always want to build a reasonable relationship between you and the auditor. For example, let’s say you get pulled over by a police officer because you were speeding. Obviously, you don’t want to get a ticket. So what do you do? Cooperate—and don’t have an attitude. The same rules apply during the auditing procedure.
Wheel and Deal
The main goal for auditors is to complete the process in a timely manner and make sure you comply with the IRS protocol. With this in mind, the IRS may be willing to cut deals with you. If you can show reasonable cause for any of your assessed penalties, the agency will usually waive them. Also, it’s worth noting that canceled checks and receipts aren’t the only forms of proof. Hypothetically, if a natural disaster occurred during the calendar year and destroyed your records, the IRS may accept reconstructed financial documents such as bank statements and supplier invoices. Examiners might even allow oral testimony for questionable areas on your tax return if you’re following guidelines swimmingly.
Try Appealing Your Audit
If all else fails and you’re unsatisfied with the outcome of your audit, you can request to have your case reviewed by the IRS Office of Appeals. It’s absolutely free to do it, and according to the book Stand Up to the IRS, the average taxpayer had his or her overall due amount reduced by 40 percent.
All in all, the most important thing to acknowledge is honesty. If you report everything accurately, you shouldn’t run into any problems with Uncle Sam. To ensure you’re on the right track, consider working with 1-800Accountant. We provide accountants, certified public accountants and enrolled agents who are available to assist with any of your tax and accounting needs.